Currency Manipulation

By April 15th, the American Treasury Department was required to present Congress a report on the exchange rate policies of the country’s major trading partners intending to identify those countries that cheapen their currency in order to attract other countries and increase their exports.

A Barter for Negotiations?

By April 15th, the American Treasury Department was required to present Congress a report on the exchange rate policies of the country’s major trading partners intending to identify those countries that cheapen their currency in order to attract other countries and increase their exports.

It would be hard to find an economist who would feel that China fits the bill. China, which accounted for almost half of America’s trade deficit in goods with the rest of the world, has a significantly modest global surplus of around 2.4%. It has been pushing the currency up and not devaluing it.

Trump’s alleged accusation?

Trump accused China and Japan for having devalued their markets and labelled them as currency manipulators. From the year 2000 to 2014, China has devalued their currency to maintain competitive advantage for their exports, buying dollars and even adding trillions to the foreign reserve around this period. Trump promised to repeatedly label China as a currency manipulator because of their past efforts to drive down their currency to take trade advantage.

But in recent reports, the Treasury Department also acknowledged that in the recent years they have taken steps to boost their currency. Because of which, Trump has backed away from labelling China as a currency manipulator as he also believed that the US dollar was becoming too strong which would also hurt their economy.

What are the implications for the U.S. Economy with the devaluation of the yuan?

With the Chinese devaluing their currency, it would take fewer dollars to buy goods from the China, so the price at which the goods are sold in the U.S. would decline.

In turn the consumers and the businesses importing from China would benefit and the sale of Chinese imports would rise. But unfortunately, a devalued yuan would not benefit everyone. In comparison, if Chinese goods are cheaper it would mean that U.S. goods are more expensive effecting their exports and slowing down their jobs and growth rate. Therefore, a rise in the imports and the fall in exports would not be a desirable outcome for the U.S. economy. With China keeping their products artificially cheaper in the U.S, this would also create unfair competition not only with America but with all other economies.

Assessment

For the United States to accelerate their growth and restore their employment, they would have to eliminate or reduce their trade deficit. Without hampering with their budget, they would have to enforce that countries stop manipulating their currencies thus allowing the dollar to regain the competitive level. The US would have to adopt strategies with countries that would also be widely affected by currency manipulation like India, Brazil, Australia and Mexico. The United States should try and focus on reinventing their domestic economy instead of pursuing unilateral or trying to spread a multi-lateral agreement. 

China being the second largest economy in the world would have to contribute to the global economy pushing Chinese businesses to compete with several regional rivalries to supply the world with everything from raw materials to finished goods, hence a cheaper yuan will only make exports seem cheaper potentially boosting overall sales that has been the main driver of growth. Hence, for China, cheaper goods would reduce inflationary pressure and keeps the interest rates low for a longer time.  But this devaluation could prompt an angry reaction from U.S. and other Asian countries that would force them to devalue their currency which would increase the trade deficit.

Hence, China should allow for its currency to adjust to market forces rather than using tools of economic warfare. 

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